WASHINGTON (Thomson Financial) - The heads of several Federal Reserve regional banks changed their tune this past week, in what economists say is a message to the public that it should not view the central bank's recent aggressive easing and liquidity measures as commonplace.
'The Fed is trying to show the world that those measures they carried out are really emergency situations,' said Ashraf Laidi of CMC Markets.
Michael Gregory of BMO Capital Markets Gregory believes the Fed's tone signals that it will ease back on its aggressive monetary policy, and wait for their liquidity measures, rate cuts and the administration's stimulus rebate checks to take effect. 'I think it's the game plan,' he said.
Philadelphia's Charles Plosser on Friday stressed that the Fed needs to begin managing the expectations of the public it intends to serve.
'Unfortunately, what the public has come to expect of monetary policy, and central banking more generally, has risen considerably over the years. Indeed, there seems to be a view that monetary policy is the solution to most, if not all, economic ills,' he said.
The Fed began exercising its creative liquidity measures in December, when it created the first-ever Term Auction Facility, through which banks can anonymously bid for loans. The facility allows them to avoid the stigma of borrowing from the Fed's discount window. Just this month, these loans have been extended to primary dealers of Treasury securities. And in a surprising action, the Fed has also loaned 30 bln usd to facilitate the buyout of Bear Stearns by JP Morgan.
Atlanta Federal Reserve Bank President Dennis Lockhart defended the Fed's involvement in the Bear Stearns buyout, noting the actions 'were taken with a prudent acknowledgement of the unintended consequences that may accompany almost all policy interventions.' He called the conditions under which these decisions were made 'fast moving' and 'perilous.'
Meanwhile, Minneapolis Fed President Gary Stern warned that the Fed's actions encourage future risk-taking by institutions that expect to benefit from future support. 'Such risk-taking can even contribute to the specific financial conditions that prompt further economic support,' he said.
Fed speak also extended to concerns over the effect of the central bank's rate cutting campaign, which has sharply reduced the fed funds rate to 2.25 pct.
Dallas Fed President Richard Fisher, one of two dissenters at the last FOMC meeting, said on Wednesday that he is aware of the fact that the Fed's rapid easing could 'create the conditions for sustainable inflation over the long term.'
'The last FOMC meeting was really quite contentious,' said Bernard Baumohl of Economic Outlook Group. 'Clearly, there is a general disagreement about whether the Fed has gone too far,' he said.
Fed speeches are typically watched closely for signs of future cuts to the target rate. But Tony Crescenzi of Miller Tabak said such a focus may be misplaced. 'Does anyone really care where the funds rate is at this point?' he asked.
After all, the Fed is fastly approaching negative real interest territory and 'there's not much more they can do in terms of liquidity,' Gregory said.
The dissension and the less-than-expected cut to the target rate at the last FOMC meeting was 'a very powerful signal that they will now approach rate reductions more cautiously,' Gregory said. He noted that his group, BMO Capital Markets, has pared down its forecast for a future fed funds cut from a half percentage point to a quarter percentage point.
The tone of this week's Fed speech may also be a way for the Fed to avoid the reputation of lender of last resort. 'From my perspective reputational capital is always tenuous,' Plosser said. tfn.newsdesk@thomson.com+tessa.moran@thomson.com tlm/wash/jlw COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
'The Fed is trying to show the world that those measures they carried out are really emergency situations,' said Ashraf Laidi of CMC Markets.
Michael Gregory of BMO Capital Markets Gregory believes the Fed's tone signals that it will ease back on its aggressive monetary policy, and wait for their liquidity measures, rate cuts and the administration's stimulus rebate checks to take effect. 'I think it's the game plan,' he said.
Philadelphia's Charles Plosser on Friday stressed that the Fed needs to begin managing the expectations of the public it intends to serve.
'Unfortunately, what the public has come to expect of monetary policy, and central banking more generally, has risen considerably over the years. Indeed, there seems to be a view that monetary policy is the solution to most, if not all, economic ills,' he said.
The Fed began exercising its creative liquidity measures in December, when it created the first-ever Term Auction Facility, through which banks can anonymously bid for loans. The facility allows them to avoid the stigma of borrowing from the Fed's discount window. Just this month, these loans have been extended to primary dealers of Treasury securities. And in a surprising action, the Fed has also loaned 30 bln usd to facilitate the buyout of Bear Stearns by JP Morgan.
Atlanta Federal Reserve Bank President Dennis Lockhart defended the Fed's involvement in the Bear Stearns buyout, noting the actions 'were taken with a prudent acknowledgement of the unintended consequences that may accompany almost all policy interventions.' He called the conditions under which these decisions were made 'fast moving' and 'perilous.'
Meanwhile, Minneapolis Fed President Gary Stern warned that the Fed's actions encourage future risk-taking by institutions that expect to benefit from future support. 'Such risk-taking can even contribute to the specific financial conditions that prompt further economic support,' he said.
Fed speak also extended to concerns over the effect of the central bank's rate cutting campaign, which has sharply reduced the fed funds rate to 2.25 pct.
Dallas Fed President Richard Fisher, one of two dissenters at the last FOMC meeting, said on Wednesday that he is aware of the fact that the Fed's rapid easing could 'create the conditions for sustainable inflation over the long term.'
'The last FOMC meeting was really quite contentious,' said Bernard Baumohl of Economic Outlook Group. 'Clearly, there is a general disagreement about whether the Fed has gone too far,' he said.
Fed speeches are typically watched closely for signs of future cuts to the target rate. But Tony Crescenzi of Miller Tabak said such a focus may be misplaced. 'Does anyone really care where the funds rate is at this point?' he asked.
After all, the Fed is fastly approaching negative real interest territory and 'there's not much more they can do in terms of liquidity,' Gregory said.
The dissension and the less-than-expected cut to the target rate at the last FOMC meeting was 'a very powerful signal that they will now approach rate reductions more cautiously,' Gregory said. He noted that his group, BMO Capital Markets, has pared down its forecast for a future fed funds cut from a half percentage point to a quarter percentage point.
The tone of this week's Fed speech may also be a way for the Fed to avoid the reputation of lender of last resort. 'From my perspective reputational capital is always tenuous,' Plosser said. tfn.newsdesk@thomson.com+tessa.moran@thomson.com tlm/wash/jlw COPYRIGHT Copyright Thomson Financial News Limited 2007. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.